Real estate, particularly in GCC countries, continues to be out of favour
Islamic bonds that pay returns based on cash flows from airports and utilities rather than income from property may stay in favor in the coming year after a drop in Arabian Gulf real estate prices shook investor confidence.
Saudi Electricity Co’s 7bn riyal ($1.9bn) sukuk sold in May was underwritten by income from fees such as connection charges, according to its prospectus. Nomura Holdings, Japan’s largest brokerage, sold Islamic debt in Malaysia in July using aircraft as the underlying asset. Pakistan raised 51.8bn rupees ($605m) in a Nov 8 Islamic bond sale linked to the Jinnah Terminal at Karachi’s Quaid-e-Azam International Airport.
The 50 percent decline in real estate prices in Dubai from their peak in mid 2008 contributed to a 31 percent retreat this year in global sales of Islamic debt that pay asset returns to comply with the religion’s ban on interest. Offerings are picking up following an agreement by Dubai World, one of the emirate’s three main state owned holding companies, in September to reschedule debt payments.
“With new bonds coming after debt restructuring in the Gulf, investors will be keen to know the quality of businesses and what kind of cash flows they generate,” Esther Teo, who helps manage the equivalent of $2.9bn of Islamic and non Islamic funds at Kuala Lumpur based HwangDBS Investment Management, said in an interview yesterday. “The asset linked to a sukuk is important given the way it is structured and after the default concerns in the Middle East,” he said.
Saudi Arabian Oil and Total, Europe’s third biggest oil company, plan to sell $1bn of sukuk this year in a joint issue, Simon Eedle, global head of Islamic banking at Credit Agricole, the lead arranger, said in Abu Dhabi in October. Nakheel, the developer of palm shaped islands off Dubai’s coast, may issue sukuk to its trade creditors in the first quarter, Faisal Mikou, executive vice president at the Investment Corp of Dubai, said in the emirate on Nov 28.
The Palestine Monetary Authority will offer Islamic debt for the first time in 2011. The central bank may sell as much as $50m of notes to jump start the territory’s Shariah compliant finance industry and raise funds to construct its headquarters, Governor Jihad al Wazir said in an interview in Ramallah on Nov 25.
Sukuk sales dropped to $13.7bn this year, according to data compiled by Bloomberg. Offerings from the Gulf Cooperation Council, which comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE, declined 40 percent to $4bn in 2010 from the same period last year.
“Real estate continues to be out of favor, particularly in the Gulf Cooperation Council countries,” Rafael Martinez Dalmau, the Singapore based head of Shariah compliant portfolio management at BNP Paribas, said in an interview in Kuala Lumpur yesterday.
KPJ Healthcare, a Malaysian healthcare provider, plans to sell as much as 500m ringgit ($159m) of sukuk to refinance debt and fund its capital spending needs, according to a company statement on Nov 12. Rafeah Ariffin, KPJ Healthcare’s head of communications, didn’t respond to emailed questions sent yesterday about the debt’s backing.
“We want issuers to meet their liabilities from cash flows they generate from their businesses rather than by selling that asset,” Sajjad Anwar, who helps manage the equivalent of $160m of Islamic and non Islamic funds at NBP Fullerton Asset Management, said in a Nov 30 phone interview from Karachi.
“Collateral based on real estate or a piece of land was popular, but it was not likely to be a long term solution,” he said.
Shariah compliant bonds returned 11 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. Debt in emerging markets gained 12.8 percent, JPMorgan Chase’s EMBI Global Diversified Index shows.
The difference between the average yield for emerging market sukuk and the London interbank offered rate narrowed 11 basis points yesterday to 350 points, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index.
The yield on Malaysia’s 3.928 percent Islamic note due June 2015 rose seven basis points this week to 2.97 percent, according to prices from Royal Bank of Scotland Group. It climbed from a record low of 2.33 percent on Nov 4. The yield on Dubai’s 6.396 percent sukuk due November 2014 declined three basis points yesterday to 6.78 percent, data compiled by Bloomberg show.
The extra yield investors demand to hold Dubai’s government sukuk rather than Malaysia’s narrowed 14 basis points yesterday to 376, according to data compiled by Bloomberg.
“In asset backed sukuk, or sukuk that is secured with assets either through a true sale or as collateral, if that asset has reduced in value by so much percent, irrespective of what nature of instrument you have, that instrument will be adversely affected,” Yavar Moini, senior adviser for global capital markets at Morgan Stanley in Dubai, said in an interview in Kuala Lumpur yesterday.